Late last month, Bed Bath & Beyond (BBBY) revealed a new plan to pull itself out of an accelerating downward spiral.
Under interim CEO Sue Gove, the company plans to cut costs to the bone, shift its merchandise mix back toward national brands to win back customers, close another 150 underperforming stores, and postpone virtually all long-term strategic investments. Meanwhile, Bed Bath & Beyond locked up $505 million of new debt financing to shore up its liquidity.
By lining up new financing and slashing spending to reduce cash burn, management hopes to buy time to turn things around. Unfortunately, even these heroic efforts are unlikely to save the iconic home furnishings retailer.
Business remains awful
Three months ago, Bed Bath & Beyond announced that comparable sales fell 23% year over year in the first quarter. That led to a net loss of $358 million and quarterly cash burn of nearly $500 million. Management projected that sales trends would remain similar in the second quarter before improving in the second half of fiscal 2022.
In conjunction with its late-August strategy update, Bed Bath & Beyond said that its comp sales decline accelerated to around 26% last quarter. Cash burn improved somewhat to around $325 million, but that's still extremely high by objective standards.
Management still expects sales trends to improve soon -- but not by much. The company is now calling for a comp sales decline in the "20% range" for the second half of the fiscal year. That will almost certainly prevent Bed Bath & Beyond from returning to profitability, despite its aggressive cost-cutting plans.
No quick fix available
Focusing on cost cuts is the right move for Bed Bath & Beyond, as it offers the only plausible path to survival. That said, it will probably prove to be too little, too late.
For example, Bed Bath & Beyond just wrapped up a two-year program to close 20% of its namesake stores. Those closures haven't had any noticeable positive effect on the company's finances. The decision to close almost 20% of the remaining Bed Bath & Beyond stores just after completing the previous downsizing highlights how store closures are a symptom of a failing brand more than a solution.
Image source: Author.
Additionally, slashing costs and capital spending won't fully address Bed Bath & Beyond's cash burn. After all, the company burned $325 million last quarter. Reducing quarterly spending by $200 million would buy some breathing room, but it still wouldn't make the business sustainable.
Interest expense will rocket higher
The bulk of Bed Bath & Beyond's new financing consists of a $375 million term loan with a floating interest rate that will start at approximately 10%. With the Federal Reserve likely to continue raising interest rates in the months ahead, that interest rate could approach 12% by mid-2023.
Meanwhile, Bed Bath & Beyond drew $550 million on its revolving credit facility during the first half of fiscal 2022. Those borrowings carry a much lower interest rate (around 4% today), but that will also rise as the Fed raises rates.
In total, Bed Bath & Beyond's recent borrowings could add around $75 million to its annual interest expense next year. That will complicate the company's efforts to get back to breakeven or better.
Just a desperation play
There's only one plausible route back to profitability for Bed Bath & Beyond: a sales rebound. But that will be virtually impossible to accomplish if home furnishings spending continues to retreat.
Unfortunately, inflation remains very high, which will force many consumers to cut back on discretionary purchases. And the Fed's moves to fight inflation by raising interest rates could tip the economy into a recession next year. Given how much people invested in sprucing up their homes during 2020 and 2021, buying more home-related items probably won't be a priority in the next couple of years.
U.S. Consumer Price Index (year-over-year change), data by YCharts.
Even after its capital raise, Bed Bath & Beyond has just $1 billion of liquidity, down from $1.4 billion at the beginning of fiscal 2022. The company also plans to sell 12 million shares, but at current prices, that would only raise about $100 million.
This liquidity cushion gives Bed Bath & Beyond about a year to get sales and earnings back on track. Barring a stunning turnaround in the macroeconomic environment, that won't be enough time. By late 2023, liquidity will probably be down to critical levels again, with a $300 million debt maturity looming in mid-2024 -- making bankruptcy virtually unavoidable.
